Displaying items by tag: private equity

According to Echelon Insights, 2024 will be another strong year for M&A activity with larger RIAs picking up smaller firms. This follows a strong year for the industry in 2023 despite headwinds such as higher borrowing costs which impacted buyers’ ability to impact financing. Yet, the robustness of M&A in less than ideal conditions reveals strong fundamentals.

In 2023, there were more than 320 deals for RIAs. It was the second-highest year on record other than 2022 which saw 342 deals. Over the last 5 years, the number of deals in the space have grown at a 12.1% annual compounded rate. Average assets per transaction was up 4%, while private equity was the most aggressive acquirer. In total, the sector was involved in 71% of deals and added cumulative assets of $466 billion.

Last year, the largest transactions in terms of asset size were Captrust and Cetera Financial Group. Cetera acquired Avanax for $1.2 billion to bolster its succession planning offerings and tax and wealth management capabilities. Captrust acquired Trutina Financial for $1.1 billion and had a total of 8 deals, adding $14 billion in assets. 

Finsum: Research firm Echelon Insights is forecasting another strong year for RIA M&A activity in 2024. 2023 had the second-most number of deals, despite several macro headwinds. 

The SEC has approved the first set of bitcoin ETFs this week following a long review process. Multiple ETFs began trading on Thursday to prevent any firm from having a first-mover advantage. So far, the iShares Bitcoin Trust is the leader in terms of inflows followed by the Bitwise bitcoin ETF and the Fidelity Advantage Bitcoin ETF.

This may adversely affect demand for gold as investors will have another option to diversify portfolios. According to Joy Yang, the Global Head of Index Product Management at MarketVector Indexes, these new ETFs will likely result in gold remaining range bound around current prices due to less interest from investors. She believes it could be similar to 2021 when gold underperformed during the bull market in cryptocurrencies.

Still, she doesn’t see gold falling below $2,000 in 2024 and is bullish on it in the longer-term due to geopolitical risks and economic and financial uncertainty. And she acknowledges that gold has more upside if the Fed is forced to cut more aggressively than currently anticipated. 

Overall, gold and bitcoin have many similarities despite one being less than 2 decades old, while the other has been around since the dawn of humanity. And both are ‘stores of value’ relative to currencies and offer protection against inflation. 

Finsum: Approval of multiple bitcoin ETFs is expected in the coming weeks. This is likely to have a negative impact on gold demand as investors will have another option to diversify their portfolios.

Over the next few years, it’s expected that alternative assets will become a larger part of client portfolios. Advisors will have to contend with a changing landscape especially as more products will be introduced that are more complicated in terms of taxes and reporting. 

A looming challenge for advisors will be handling the increased workload as well as understanding these products in a comprehensive manner in order to explain it to their clients. It’s likely that asset managers will form partnerships with RIAs in order to help them navigate and simplify the process. Already, some asset managers have started to invest in efforts to educate advisors, but more will be necessary given the increase in the number of options.

According to Ernst & Young America's Financial Services, some advisors will increase allocation to alternatives to 10% or more. In the near-term, private credit products will see the strongest growth as they are seen as less risky while offering higher yields than fixed income.

In addition to private credit, most exposure to alternatives currently is through liquid alt mutual funds, liquid alt ETFs, and publicly-traded REITs. Over the next couple of years, areas forecast to have the highest growth in terms of assets are cryptocurrencies, digital assets, hedge funds, private equity, and private debt. 

Finsum: The alternative assets space is expected to heat up in the coming years. One challenge for advisors will be to understand these products and handling an increased workload. 

JPMorgan issued its 28th annual Long-Term Capital Markets Assumptions report, which provides long-term forecasts for various asset classes in addition to detailing risks and upside catalysts. One of the recommendations in its report is to add a 25% position to alternative investments which it believes will increase returns by 60 basis points on an annual basis while also reducing volatility. 

In terms of the 60/40 portfolio, JPMorgan is forecasting annual returns of 7% which is a slight decrease from last year’s forecast of 7.2% annual returns. Pulkit Sharma, JPMorgan’s head of real assets and alternative investment strategy, remarked, “The alternative asset classes are becoming more essential than optional in the broader 60/40 toolkit. Inflation is going to be more and more sticky, so you need more diversifiers and inflation-sensitive asset classes.” 

The bank also believes that investors need to seek out diversification especially, since it expects continued geopolitical uncertainty and volatility stemming from central bank decisions. Fixed income is simply not an effective diversifier in higher-inflation environments as evidenced by the last couple of years. Some of the alternative assets it recommends boosting diversification are real assets, hedge funds, and private credit. 

Finsum: In its annual long-term review and forecast of various asset classes, JPMorgan slightly reduced its expectation of long-term returns for a 60/40 portfolio and stressed the role of alternatives to boost returns and improve diversification.

Alternative investments can add value to portfolios by boosting returns and leading to increased diversification according to a recent UBS white paper on the subject. Within the category, it favors specialist credit hedge funds, macro hedge funds, secondaries in private equity, and specific types of private debt. However, it does note that investors should be aware that there is a tradeoff in terms of reduced liquidity. 

The firm recommends a 20% allocation and believes that it could lead to an annual increase of 50 basis points in the long term. It’s increasingly of interest given the asset class’s strong performance in 2022 when stocks and bonds both delivered double-digit, negative returns. In contrast, most diversified alternatives’ indices saw performance between -6% and +17%. In terms of forward returns, the bank forecasts return between 6% and 11% over a full business cycle.

In terms of specific strategies, UBS recommends specialist credit hedge funds which focus on differences between strong and weak companies. It also favors secondaries in private equities and notes some attractive discounts in the space. The bank also sees upside to private debt given that yields are around 12% with lower default risk than high-yield credit. 

Finsum: UBS is bullish on alternative assets. It believes that the asset class can boost returns while also increasing diversification.